Earnings Call Transcript - GIL Q2 2024

Jessy Hayem, Vice President, Head of Investor Relations

Thank you, Jeannie. Good morning, everyone. Earlier we issued a press release announcing our results for the second quarter of 2024, along with our interim shareholder report containing management's discussion and analysis, as well as consolidated financial statements. These documents are expected to be filed with the Canadian Securities and Regulatory Authorities and the US Securities Commission today, and they'll also be available on our corporate website. Joining me on the call today are Glenn Chamandy, President and CEO of Gildan; Rhod Harries, Executive Vice President and Chief Financial and Administrative Officer; and Chuck Ward, President, Sales, Marketing and Distribution. This morning, we'll take you through the results for the quarter and then a question-and-answer session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements, which involve unknown and known risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the US Securities and Exchange Commission, and Canadian Securities Regulatory Authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now I'm very happy to turn the call over to Glenn.

Glenn Chamandy, President and CEO

Well, thank you, Jessy, and good morning, everybody. First, I'd like to take a moment to sincerely thank all of our employees, shareholders and customers and our new Board of Directors for their incredible support to the company and to myself personally over the past several months. I'm very proud to be here today celebrating Gildan's 40th anniversary with our dedicated team. Last fall, I communicated to shareholders that Gildan's positioning had never been stronger with the largest pipeline of innovation in the company's history rolling out this year. Today, I can confirm that everything is on track, and we're continuing to widen our competitive advantage. We continue to execute on Gildan's sustainable growth strategy. We're delivering on each of our three pillars where we're seeing significant progress to date. On capacity growth, our Bangladesh ramp-up is on track. We'll be at 75% exit capacity at the end of this year. On innovation, our soft cotton technology is performing well, where we're starting to see good results in the market with positive POS on basics in Q2. On ESG, we just launched our 20th anniversary ESG report focusing on our accomplishments, of which we're very proud. We reported Q2 results that were strong and in line with our expectations with solid top-line and strong adjusted operating margins. We also announced in our press release that we're reconfirming our full year 2024 guidance and we're providing our three-year outlook. We're capitalizing on our GSG strategy, where we're well positioned to deliver top-line growth in the mid-single-digit range, adjusted diluted EPS growth in the mid-teen range over 2025 through 2027, which is in line with our supercharge plan. I'm looking forward to answering your questions after Rhod's formal remarks, and thank you again.

Rhod Harries, Executive Vice President and Chief Financial and Administrative Officer

Thank you, Glenn, and good morning, everyone, and thank you for joining us today to discuss our second quarter results. I'll start by going over the specifics of the quarter. I'll talk briefly about our new NCIB program, and then I will comment on our outlook and guidance for 2024, before recapping our outlook for the 2025 to 2027 period. So let's get started. As Glenn mentioned in his remarks, the quarter unfolded largely as we anticipated. We reported sales of $862 million, up $22 million or 3% at the higher end of our guidance for the quarter of flat to low-single-digit growth. If we exclude the impact of the phase-out of Under Armour, net sales for the quarter are up mid-single digits year-over-year. This was driven by a strong performance in Activewear, up $45 million or 6%, where we saw increased Activewear shipments reflecting positive POS trends across all channels and geographies as well as favorable mix, which was driven by higher replenishment of fleece by North American distributors ahead of our peak selling season. Strong Activewear sales in the quarter were further reinforced by continued market share gains in fleece and ring spun products, which are key growth categories. We were also pleased to see a positive market response to products that we recently introduced, which feature key innovations such as our soft cotton technology. Finally, in international markets, we performed well in the quarter with sales up by 7%. Turning to Hosiery and Underwear. As expected, this category was down 16% versus the prior year, mainly owing to the phase-out of the Under Armour business and to a lesser extent to unfavorable mix and continued broader market weakness in Innerwear. That said, if we exclude the impact of the Under Armour phase-out, our Hosiery and Underwear sales would have been up mid-single-digits year-over-year. Turning our focus to margins for the quarter. Our gross margin was 30.4% versus 25.8% in the prior year, a 460 basis point improvement, primarily due as anticipated to lower raw material and manufacturing input costs. Moving to SG&A. Expenses were $124 million in the quarter and included significant charges related to the proxy contest and related matters, which totaled $57 million in the quarter. These charges are detailed fully in our press release and our MD&A and impact the GAAP numbers. Excluding these charges, adjusted SG&A expenses were down 15% to $66 million or 7.7% of net sales versus 9.3% for the same period last year. The reduction reflected the significant positive benefit of the jobs credit introduced by Barbados as part of their economic policies, which was retroactive to January 1st, 2024, and which totaled $17 million in the quarter. Note that SG&A would have been approximately 9% of net sales if we had reflected the benefit of the jobs credit only for the second quarter as opposed to a retroactive impact. Putting these elements together and adjusting for proxy contest matters, we generated an operating margin of 22.7%, up 620 basis points compared to the prior year, coming in above the high end of our 18% to 20% target range and in line with our previously provided guidance.

Jessy Hayem, Vice President, Head of Investor Relations

Thank you, Rod. This concludes our prepared remarks and now we'll be taking your questions. Before moving to the Q&A session, as usual, I'd like to remind you to limit your questions to two and then we'll circle back for a second round if time permits. Jeannie, you may begin the Q&A session, please.

Paul Lejuez, Analyst

Hey, thanks guys. Curious if you could talk about where you saw the strongest and weakest POS trends during the quarter and what POS has looked like in the third quarter to date? Curious if you've seen any changes that are influencing your outlook? And then second, can you just talk about the competitive landscape in both Activewear and Hosiery? You've got some weak competitors out there, I think you would say, and I'm curious how that might be impacting the pricing environment, if at all.

Glenn Chamandy, President and CEO

Let's begin with the competitive landscape, and then Chuck can address the point of sale. We are continuing to strive, invest, and innovate in our market, and we believe we are establishing a strong competitive advantage. We think we have widened the gap between us and many of our competitors. Some of our competitors, like Delta, have filed for Chapter 11, and we see that others in the industry are also struggling. This makes us optimistic about our chances to execute effectively, especially in growth areas such as the fashion T-shirt category and fleece, where we hold a leading position. We are very excited about the current state of the landscape, which we see as weak, and we are focused on further solidifying our competitive positioning.

Chuck Ward, President, Sales, Marketing and Distribution

And Paul, regarding the POS, I mean as we progress through the quarter, we saw improving POS through the quarter overall, with June ending mid-single digits. The first part of July started off a little slower, but it's improved as we've gone through the month to where we're ending July kind of flat to slightly down. But, overall, the strength continues to be in the fleece and the ring spun categories, where we're doing very well and we're taking share. If you look at the market overall, the market was down a bit, but we were up. So we're continuing to see strength in our fleece and ring spun categories. And then overall on the retail side, I would say the Underwear market has been kind of mixed overall. But again we think we're continuing to perform well there. Then on the international front, we're actually seeing great improvement on the international side with international up high-single digits. Kind of still some mix between the UK and Continental Europe with Continental Europe being higher, but overall good positive growth there in the international markets.

Paul Lejuez, Analyst

Got it. Have you seen a change in the pricing environment with the Delta situation? Are you doing anything different to take advantage of market share?

Glenn Chamandy, President and CEO

Look, I mean, early in the season, obviously, they were liquidating a lot of inventory, so it put a little bit of price pressure, particularly in our national account segment. But that inventory has dried up pretty quickly. And as we go forward, that would be an upside in terms of stabilization in that segment. And also look at Delta's revenues in this segment were roughly around close to $400 million, and that's an opportunity for us as we move into next year. And we continue to focus on driving our national account business, which is where they had, I think, their largest sales penetration.

Mark Petrie, Analyst

Yes, thanks. Good morning. I wanted to just follow-up on the comment with regards to fleece. You called out growth, but then Chuck, I think you were saying that the category was softer. Could you just clarify that? And when it comes to Gildan's performance specifically, how much of that would be market share gains versus the restocking that you called out?

Glenn Chamandy, President and CEO

Well, maybe just to start with is that we think that the overall market was down probably around mid-single digits basically for the quarter. And what Chuck alluded to is that we've done really well because if you look at our POS in Q2, it started off slow, but in June, we had positive 4% POS in a somewhat down market. So we're gaining share. And all that share gain is coming out of fashion basics and fleece. So we are performing really well. We're taking share. The category is growing. We've seen very, very strong sales in fleece. And we have a huge order book in fleece for Q3 and Q4 already. And we're well positioned to execute on our guidance for 2024.

Chuck Ward, President, Sales, Marketing and Distribution

I would say overall, inventory is in line and in balance. As we look at it, you have some accounts that are a little bit better stocked than others and others may be a little short. But overall, I would say it's well in balance. That includes retail distributors. On the international side, I would say there's areas where it's a little light. But with the Bangladesh ramp up that both Glenn and Rhod talked about earlier, we should see that resolved in Q4 so that we're seeing better inventory positions in international by that point. So again, overall in balance.

Brian Morrison, Analyst

Thank you. Good morning and nice feedback in the chair, Glenn. Can you maybe just talk about the current capacity utilization at Bangladesh today? I realize it's going to be 75% at year-end, the impact from the recent civil unrest. Glenn, have you visited the site? And where are we with respect to moving forward with Phase 2?

Glenn Chamandy, President and CEO

Okay. Well, I would say that, look, everything is on track with Bangladesh. And maybe just to take a step backwards, if you look at Gildan's whole manufacturing system today, we have a lot of room for optimization and continued improvement. And one of the things I think that we've undergone a couple of years ago which is our yarn modernization plan, which is still being completed. So we fully haven't optimized our cost structure of all of our yarn facilities. And another point of reference I think for us would be is that we pointed out that we're only running around 85% capacity. And that's also another big opportunity for the company as we move into the future where we continue to look at filling up our capacity with a much more optimized level. So, and then as far as Bangladesh is concerned, we're ramping up the facility. We believe we'll be at 75% of our exit capacity of the facility by the end of this year. And that ramp-up is coming also at a cost. So all these big three initiatives are important because these are, I think, initiatives that will continue to give us some upward momentum in our operating margins as we move forward, as we continue to optimize our manufacturing. And I think we're in a good position. We're looking at Phase 2 right now. We believe within the three-year period in terms of our guided CapEx about the 5% that would include actually the development of that facility in our CapEx.

Brian Morrison, Analyst

That's great. Can I just follow-up on that? Is there any impact from the recent civil unrest? And did I understand correctly that it was margin dilutive in Q2, the Bangladesh facility?

Glenn Chamandy, President and CEO

Well, I would say to you, look I mean, in our and the point I'm trying to make if you look at the operating margins that we're delivering today, embedded in those operating margins are the start-up of Bangladesh and the inefficiencies of not running our facilities at 100%. And we haven't really optimized our yarn spinning to its fullest. So as we continue to execute and deliver and build these three areas that will allow us to actually increase our operating margins as we move forward. So we've already got really good operating margins and the point is that we've got negative efficiencies embedded in them.

Rhod Harries, Executive Vice President and Chief Financial and Administrative Officer

Yes, Brian. So we try to give you as much guidance as we could on SG&A. And I think, overall, we believe we're performing very well, right? SG&A has been a big focus. It was a big focus under back to basics. And as we've moved into the GSG strategy, we really are delivering on it. So if you look at the call out for the quarter, effectively 7.7% is very low, but we do have the benefit. I indicated that in my remarks that if you adjust for the retroactive impact, we're basically would have been around 9%. And I think if you move forward, we're probably going to be, I would say, near term in that 9%, 9.5% range, right? That's the way to think about it as we move through the year and as we move into 2025. But look bottom line on SG&A, we can leverage it as we go forward. We can get leverage off of SG&A. And I think one of the things that we are excited about and we called that out for the three-year outlook that we can improve our operating margin going forward. Some of that's going to come on the gross margin line and some of that's going to come on the SG&A line. But we're in great shape really to deliver margins on a go forward basis as we grow at the higher rates as we start 2025.

Vishal Shreedhar, Analyst

Hi. Thanks for taking my questions. Rhod, just following up on the comment that you gave us about expansion in gross margin. What was driving that? Is that mix? Or is that pricing? How should we think about it?

Rhod Harries, Executive Vice President and Chief Financial and Administrative Officer

So if you look at expansion in the quarter, a lot of the expansion came from improvement in raw material costs and on the manufacturing side. Now we've been flagging that for a long time, Vishal, as you will recall. And we've seen the benefit of that as we with respect to improved raw material costs as we moved into the fourth quarter of last year and then it was moved into the first quarter of this year, second quarter. We'll continue to see some of that as we move forward, but it'll abate, right, because obviously on a wraparound basis, you won't get the level of improvement on a go forward basis. But the margins are performing very well. And as Glenn said, we still have not really seen the full impact of our manufacturing structure with 85% capacity utilization in Central America, the ramp up of Bangladesh still coming through, I would say, we're excited about what we see with respect to the margin evolution.

Vishal Shreedhar, Analyst

Okay. So from so should I take from your answer that in the three-year outlook, it's a little bit of everything, the mix, the manufacturing efficiency, the top line leverage? Is that a fair comment or is there any in particular that you'd point out?

Rhod Harries, Executive Vice President and Chief Financial and Administrative Officer

No, it is. All of the different areas we're focusing is firing, right? So if you actually look at the three-year outlook, our Activewear business is running very well. And if you even if you look at the numbers the past few quarters from a growth perspective, as you look on a go forward basis, Activewear is running very well and it's related to all the things that we've talked about, market share gains, innovation, new programs, international growth, they're all driving the growth as we go forward. So on the Activewear side, you can think of that as a high-single-digit type growth business. On the Innerwear side, it's lower. It's more like a low-single-digit type growth business. But I would say, we are really doing very well across all of the different product categories and channels that we're focusing on. And that is driving that strong, I would say, view of the growth that then ultimately will benefit from that as we bring all of our capacity online and drive, I would say, a really good outlook in that mid-teen EPS compound growth rate over the next three years.

Glenn Chamandy, President and CEO

No, we're pricing the products similarly then we haven't changed our prices. And the cost will be absorbed by other manufacturing efficiencies within our system.

Vishal Shreedhar, Analyst

Okay. And are you seeing higher demand as a result of this transition?

Glenn Chamandy, President and CEO

We're beginning to see positive momentum in our basics for the first time in Q2. This is still in the early stages of rollout, but I believe those who have tried the product really appreciate it. It has improved printing quality and feels better overall. Offering better quality at the same price with enhanced printability is a significant advantage for us, and we anticipate this will be very successful moving forward.

Martin Landry, Analyst

Hi. Good morning, everyone. And Glenn, it's great to have you back in the seat. So my first question is on the three-year outlook. I was wondering right now if we look at your position in the US Printwear industry, you've talked a lot about market share gains. Would you be able to give us your best assumption of where you are in terms of market share gains when we look at all your products in aggregate?

Glenn Chamandy, President and CEO

Well, look, I mean, with the market in 2023, I think, was down probably a little higher than mid-single digits and we outperformed the market. I think we're outperforming the market again this year. So I think we're in a good position. We keep taking market share and particularly in the categories of fashion and fleece. But as we look forward, what we've done is we've taken a modest view of the market where we think the market is going to be flat to low-single digits. And we'll be able to, what we think, we're going to continue to do is gain share in the fashion segment, continue driving in growth of fleece products. We're going to benefit from our innovation and our basics.

Mark Petrie, Analyst

Okay. It would be great at some point to get a more clear picture of your market share in the distributor segment, just to get a sense of what more share gains you have ahead of you guys?

Chuck Ward, President, Sales, Marketing and Distribution

And Martin, just to add, I think to be clear, we do see fleece market share gain as we go forward, right? We don't, as Glenn said, we have a big share, but we still see more opportunity on the Printwear side. We see opportunity in retail. We see opportunity in international as well. So you made the comment around flat market share there. We're growing market share in fleece, we're growing it in ring spun, and these are really important drivers because they drive volume, they drive mix, they drive price. They really, I would say, are big drivers along with all the other areas that we've talked about. So just to be clear, we're growing share everywhere.

Jay Sole, Analyst

Great. Thank you so much. Glenn, a couple of questions. Number one is just given the unusual kind of time period that just went that just played out, did you have some time away from the business? Can you just talk about any insights you had just maybe from just having different perspective looking at the business from where you were versus from before?

Glenn Chamandy, President and CEO

I'll talk about the first part and Rhod will answer the leverage part. But I would say to you, looking back, I mean, like I said in my comments earlier is that in the fall, I've never thought the company has been in better position on a go forward basis. I mean, everything was firing on all cylinders and we were prepared. We invested in Bangladesh where we knew that that was going to be a key to the success of our fashion basics and also offsetting some of the trends of inflation in Central America. We've developed the largest innovation pipeline on every single product. And we keep mentioning basics, but it's including fleece has been totally revamped. Our Comfort Colors brand. We've got a lot of new technology there as well. So we've spent two years developing all this. So like we were and I would say that in the fall, we were in a breakout mode of really, I think, firing on all these cylinders and taking a step backwards, I was saying to myself, and say look this was a little bit crazy to be honest with you. And now that I'm back I can see that everything is intact.

Rhod Harries, Executive Vice President and Chief Financial and Administrative Officer

And Jay, on the share buyback. So we finished the end of the second quarter with leverage 1.6 times. You can tell we're excited about the strength of the business on a go forward basis. And you can also see that our free cash flow will be very strong as we move through the back half of the year. So as we effectively move through Q3, Q4, we do expect to continue to repurchase shares. And ultimately, we're going to drive towards two times leverage at the end of the year.

Jessy Hayem, Vice President, Head of Investor Relations

Thank you, Jeannie. Once again, we'd like to thank everyone for joining us and attending our call today and we look forward to speaking with you soon. Have a great day.